Advisers cautious about Latin America

After five years when investing in Latin America was virtually a sure thing, some industry experts are beginning to caution that the good times may be coming to an end.

“What we’re warning people about is the dollar,” said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. LLC in Jersey City, N.J. “It has seen its worst.”

That presents a problem for Latin American stocks because much of the returns U.S. investors have realized are the result of dollar depreciation, Mr. Ezrati said.

“Looking forward, people will be disappointed,” he said.

Year-to-date through May 23, Latin American stock funds had led all categories of funds, with a 15.81% return, according to Morningstar Inc. of Chicago.

The category had a one-year return of 37.72%, a three-year annualized return of 51.87% and a five-year annualized return of 47.27%.

Year-to-date for the same period, the Standard & Poor’s 500 stock index had fallen down 5.51%. The index had a one-year return of -7.8%, a three-year annualized return of 6.87% and a five-year annualized return of 10.09%, according to Morningstar.

It’s not likely that the dollar will rebound against foreign currencies, but the mere fact that depreciation likely will come to a halt will be enough to put a damper on returns, Mr. Ezrati said.

James Holtzman, a certified financial planner and adviser with Legend Financial Advisors Inc. in Pittsburgh, agrees. The fortunes of the dollar are something to keep in mind when investing in Latin American stocks or the stocks of any emerging market, he said.

“We watch the dollar every day,” said Mr. Holtzman, whose firm manages $330 million in assets. That doesn’t mean that investors should flee emerging markets such as Latin America, he added, but merely that they should be cautious.

For clients who can tolerate a relatively high degree of risk, Mr. Holtzman said, he is still recommending the iShares MSCI Brazil Index (ETF), advised by Barclays Global Investors of San Francisco.

Brazil has been a favorite of U.S. investors because it is politically stable and has a growing middle class, said David Kelly, chief market strategist at JPMorgan Funds, a unit of JPMorgan Chase & Co. in New York.

JPMorgan advises the $13 million JPMorgan Latin America Fund (JLTAX), launched in February 2007.

Not all Latin American countries can claim stability, Mr. Kelly said. However, he said, Latin America overall appears poised for long-term growth, and that’s partly because it offers a low-cost labor force.

In the past, political instability has driven away investment. But because of the political and economic changes that have taken hold in much of Latin America, more companies are likely to put their capital to work there, Mr. Kelly said.

That’s not to say that there won’t be problems for Latin American stocks in the short term, he said.

Much of the rally in Latin American stocks has been driven by the rise in commodities prices, which eventually are likely to decline, Mr. Kelly said.

The region, however, has more than just companies specializing in commodities.

According to portfolio manager Walter Prendergast, the growing middle class in Latin America presents investors with many options.

For example, Compania Cervecerias Unidas SA (CU) in Santiago, Chile, a bottler of wine and spirits, is one company that should benefit, said Mr. Prendergast, who is president of Paradigm Capital Management Growth Advisors Inc. of Albany, N.Y., an institutional and high-net-worth manager specializing in small-cap stocks.

He also thinks that Companhia de Saneamento Básico do Estado de São Paulo (SBS), which provides water and sewage services in Brazil, is another company that should benefit.

Mr. Prendergast manages the Paradigm Small Cap Growth Fund (PFSGX), which was launched Jan. 1 and has less than $1 million in assets.

Given the long-term growth potential of Latin American stocks, owning them may make sense for some investors, Mr. Ezrati said. However, he cautioned against jumping into funds or ETFs that invest only in Latin America.

“We’re wary of anything that’s too concentrated, particularly in emerging markets,” Mr. Ezrati said.

E-mail David Hoffman at [email protected].